Preparing for poverty: America will face a retirement funding crisis

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We all look forward to retirement as a time dedicated to leisure pursuits of golf in the summer sun, travel to distant lands or enjoying hobbies. A time to leave all the daily hustle and bustle behind, confident in the knowledge that there will be sufficient funds available to secure a comfortable lifestyle. Unfortunately, this dream may not be the reality of the future.

A study by the World Economic Forum (WEF) reflects there is currently a $70 trillion gap in the world's pension systems with a $28 trillion gap in the United States alone. This is expected to climb to a $137 trillion gap in the United States by 2050, when millennials will begin looking seriously at retirement. "The savings gap resembles the amount of money required," the report states, "to provide each person with a retirement income equal to 70% of their pre-retirement income."

Consistent with the WEF, an October 2017 Government Accountability Office (GAO) report, "The Nation's Retirement System," tells us that "...the nation's current retirement system (is) made up of three main pillars: Social Security, employer-sponsored pensions or retirement savings plans, and individual savings." The GAO website, under "Key Issue: Financial Security for Older Americans," lists three issues policy makers will need to consider as: "The financial shortfall facing Social Security;" "The declining security of employer-provided pension plans;" and "The growing responsibility for individuals to plan and manage their retirement."

This week, it was reported "The total costs of Social Security will exceed total income this year for the first time since 1982" and, after 2034, Social Security "will only be able to cover about 79% of benefits."

The report holds just as bleak a prognosis for Medicare:

"Medicare's hospital insurance trust fund is expected to run dry in 2026, three years earlier than what the trustees had predicted in last year's report. At that time, funds will be sufficient to cover just 91% of Medicare Part A costs."

The GAO report observed "...there has been a marked shift away from employers offering traditional defined benefit (DB) pension plans to defined contribution (DC) plans, such as 401(k)s, as the primary type of retirement plan." While the GAO website identifies as a key issue that "Combined with increases in longevity, this shift has increased the risks and responsibilities for individuals in planning and managing their retirement. Yet research shows that many households are ill-equipped for this task."

The third pillar of retirement, individual saving, also has issues. Jade Scipioni, writing for Fox Business News, tells us that:

"A report from Northwestern Mutual has found that one in five Americans (21%) have no retirement savings at all. What's more, nearly two thirds of people with a savings account or plan are certain their money will run out sooner than they hope, which would leave them, aside from Social Security, penniless."

The GAO report also observed "...economic and societal trends - such as increases in debt and health care costs - can impede individuals' ability to save for retirement." With the GAO Website telling us that "...households ...have little or no retirement savings."

Collectively, these observations recognize a serious threat to the three pillars of the current retirement system.

Teresa Ghilarducci and Tony James writing for Market Watch opined that "Based on current trends, we will soon be facing rates of elder poverty unseen since the Great Depression. As the U.S. population continues to simultaneously grow and gray, and traditional pensions become relics of the past, elderly people living in deprivation will become a progressively greater share of the population." Sam Becker summarized his observations: "This can be particularly hard to swallow for people who were promised pensions and the support of social programs. But it's quickly becoming clear that as lifespans increase and more people get to retirement age, we simply can't afford it."

The days of the retirement lunch with the presentation of a gold watch followed by a sheltered pension are a thing of the past. Having the discipline to participate in a Defined Contribution (DC) plan such as a 401K and investing in a saving plan early in one's career are two strategies to mitigate the effects of the predicted shortfalls on one's individual retirement finances.

Unfortunately, these strategies are difficult to initiate and maintain by those most at risk, especially those who are embroiled in a student loans crisis and who have a vision horizon which is cluttered by many more immediate pressing expenses and issues.

John M. DeMaggio is a retired Special Agent in Charge and retired Captain in the U.S. Navy. The above is the opinion of the author and is not meant to reflect the opinion of the U.S. Navy or the U.S. Government.